The One Big Beautiful Bill: What to Know About the “No Tax on Overtime” Deduction
This article “No Tax on Overtime” is part of Reinspired Books’ One Big Beautiful Bill Series — breaking down the new federal deductions for 2025–2028.
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Each deduction applies at the tax-return level, not in each paycheck.
Overview
The One Big Beautiful Bill introduces a new federal income-tax deduction for qualified overtime compensation.
Beginning in 2025, eligible employees can deduct the overtime premium portion of their pay — the extra ½ rate in “time-and-a-half” wages required under the Fair Labor Standards Act (FLSA).
The deduction is designed to provide temporary relief for hourly and shift-based workers who regularly earn overtime.
As of now, the deduction is claimed when you file your tax return, not through payroll. Employers should continue normal withholdings for income, FICA, and Medicare taxes until further guidance is issued by the IRS.
How It Works
- Maximum deduction: $12,500 per taxpayer ($25,000 for joint filers)
- Who qualifies: Employees covered by FLSA overtime rules
- Where to claim: New Schedule 1-A (Part II) of Form 1040
- When it starts: Tax year 2025
- Expiration: Ends after December 31, 2028, unless extended by Congress
This is an above-the-line deduction, which means you can claim it even if you take the standard deduction.
Social Security Number Requirement
To qualify for the deduction:
- You must include your Social Security Number (SSN) on your return.
- If married filing jointly (MFJ), both spouses must provide valid SSNs.
- If married filing separately (MFS), you do not qualify for this deduction.
- Any return missing a required SSN will be treated as having a clerical error, and the deduction will be denied.
This mirrors the rules for the “No Tax on Tips” deduction and ensures IRS verification of eligibility. Tips” deduction and ensures proper reporting and eligibility verification.
Income Limits (Phase-Outs)
The income thresholds are the same as for the tip deduction:
| Filing Status | Phase-Out Begins | Fully Phased Out |
|---|---|---|
| Single | $150,000 MAGI | $400,000 MAGI |
| Married Filing Jointly | $300,000 MAGI | $550,000 MAGI |
| Married Filing Separately | ❌ Not eligible | ❌ Not eligible |
If your modified adjusted gross income (MAGI) exceeds the threshold, your deduction will phase out gradually until it reaches zero.
Example:
Jordan, a nurse, earns $30/hour and often works overtime. In 2025, she earns $10,000 in overtime pay — $5,000 of which is the “half-time” premium required by the FLSA.
Because her income is under the phase-out range, she can deduct the full $5,000 from her taxable income when filing her 2025 tax return.
If she earned $200,000 in MAGI, the deduction would begin to phase out based on her filing status.
Who May Benefit
This deduction primarily helps hourly and shift-based employees who regularly work overtime, including:
- Health-care professionals (nurses, EMTs, support staff)
- Warehouse, factory, and logistics workers
- Retail and grocery employees
- Restaurant and hospitality staff
- Public safety and service workers (police, fire, transportation, sanitation)
Example:
Marcus, a warehouse supervisor, earns $25/hour and works 10 hours of overtime weekly. The ½ overtime premium adds $125 per week—over $6,000 annually. Under the new rule, $6,000 could be deducted from his federal taxable income, lowering his overall tax bill.
Who Does Not Qualify
- Highly compensated employees under § 414(q)
- Married Filing Separately (MFS) taxpayers
- Exempt salaried employees not covered by FLSA overtime rules
- Self-employed individuals, since overtime rules apply only to employees
Example Calculation
If an employee earns $25 per hour and works 10 hours of overtime, their overtime premium (½ × $25 × 10 hours = $125) counts as qualified overtime.
Over a year, that can add up — for someone consistently working 10 extra hours a week, that could mean roughly $6,500–$8,000 in potential deductible income.
Employer Notes
Employers should:
- Track overtime premium portions separately from base pay.
- Continue withholding FICA, Medicare, and state taxes as usual.
- Prepare payroll systems to report qualified overtime on W-2 Box 19 starting in 2025.
Although the IRS may eventually adjust payroll tables, there are no paycheck-level changes at this time.
Key Takeaways
- Deduct up to $12,500 (single) or $25,000 (joint) in qualified overtime pay.
- MFS filers are not eligible.
- Both taxpayers must provide valid SSNs if filing jointly.
- Phases out at $150K / $300K MAGI.
- Claimed when you file your return, not through your paycheck.
- Expires after 2028, unless Congress extends it.
What to Do Now
If you regularly earn overtime:
- Review your pay stubs and confirm overtime hours and rates are tracked accurately.
- Keep all W-2s and payroll records for 2025 forward.
- If filing jointly, ensure both SSNs are active and correct.
- Plan your filing strategy early — especially if your income approaches the phase-out range.
Reinspired Books helps employees and business owners plan ahead for the One Big Beautiful Bill changes with clear, compliant strategies.
Book your 2025 tax session at reinspiredbooks.com.
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